This forum is used to discuss Logistics and SCM best practices followed in FMCG Sector

Tuesday, February 5, 2013

Inventory Management & Control - Part III

In this session we will review about Inventory Management
& Control System.

Before proceeding further, let us understand the Inventory
Management and Inventory Control. Inventory
management focuses on getting necessary / essential inventory to the right
places at the right time , and inventory control focuses on maintaining and using that
inventory most effectively to keep costs down.

The primary objectives of inventory management are:

To minimize the possibility of disruption in the
production schedule of a firm for want of raw material, stock and spares. A low level of inventories may result in
frequent interruptions in the production schedule resulting in
under-utilization of production capacity and it lower sales. So it is important to have necessary / essential inventoriesto the
right places at the right time.

To keep down capital investment in inventories. This activity is effective inventory control method.
The investment in inventories should be
just sufficient in the optimum level. Excessive inventory is an idle resource
and it should be avoided. The major issues related to excessive inventories
are: # the unnecessary tie up of the firm’s funds and
loss of profit.The excessive level of
inventories consumes the funds of business, which cannot be used for any other
purpose and thus involves an opportunity cost #excessive carrying cost, The carrying cost, such
as the cost of storage (warehouse), handling Charges (put away, stacking,),
insurance,recording and inspection
(quantity and quality),are also
increased in proportion to the volume of inventories. This cost will impair the
concern profitability further and #the risk of liquidity / not selling due to fast
technology changes and severe competition.

Hence Inventory control activity is
a subset of Inventory Management activity.

The aim of inventory manager to maintain adequate inventory (avoid excess /
low inventory) for smooth running of the business operations. Efforts should be
made to place orders at the right time with the right source to purchase the
right quantity at the right price and quality. The effective inventory
management should

maintain sufficient stock of raw material in the
period of short supply and anticipate price changes.

ensure a continuous supply of material to
production department facilitating uninterrupted production.

minimize investment in inventories and minimize
the carrying cost and time.

maintain sufficient stock of finished goods and ensure that finished goods are available for
delivery to customers to fulfill orders, smooth sales operation and efficient
customer service.

What is Inventory
Control ?

Inventory control is a
set of policies and operating procedures that are designed to maintain and maximize
the use of inventory, so that it generates the maximum profit from the least
amount of inventory investment without affecting customer satisfaction levels.

Most companies have a never-ending goal to find the best or suitable method to control one of their largest assets (inventory). Many different
methods of inventory control exist, from the very basic to the very complex
(Refer given below chart). All methods
aim toward one target to have the lowest total cost of ownership against
inventory, while having the highest possible service levels. Some methods find
a balance between the cost and service level components, while others favor one
component over the other. Basically the inventory control method should be linked to company objective. The top management of the compnay decides that service level between Inventory and production department should be 95% on monthly basis then the inventory manager has to work out the inventory level accordingly.

Inventory control methods vary from company to
company, product to product and component to component. In a company there are few fast moving items along with slow moving items. The inventory control method
that works best for fast-moving items might not work as well for slow-moving
items. A company might have lot of products and components, but use only few different
inventory control methods. We need to understand that there is no perfect or standard method to manage inventory. A magic
formula that computes correct inventory levels does not exist. A
company can only seek to find the best method that results in reduced cost and
increased service levels.

In
the next session we will explore more about
inventory control methods with more practical example.

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About Me

* XLRI, Jamshedpur (India) Alumni specialization in Logistics & SCM.
* Six Sigma Green Belt Certification from Indian Statistical Institute,Delhi.
* PG Diploma in System Management from NIIT.
* Export Management certification from IIFT, Delhi.
* Having 18 Years of experience in Logistics & SCM field and 2 years as Sales application system designer & developer in IT Department.